Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh how times have changed. While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Arlan Hamilton is Founder & Managing Partner at Backstage Capital.
Hamilton is an emerging venture capital fund manager, and tour manager to Atlantic Records recording artist Janine & The Mixtape. Having founded and published the internationally distributed indie magazine INTERLUDE, and toured extensively as a live music production professional, she enters the venture investing world from an unconventional path. Hamilton is dedicated to minimizing funding disparities in tech by investing in high-potential founders who are of color, women, and/or LGBT.
VatorNews: What is your investment philosophy or methodology?
Arlan Hamilton: Our focus is on investing exclusively in underrepresented founders. In our case, that means women across the board, people of color and LGBT founders. Very specifically within the U.S.
When I first started, I saw this as an opportunity. About three or four years ago, I was having trouble getting what I considered enlightened investors, be that angel friends of mine or VCs that I had contacted, I had trouble getting them to understand the market of companies that were led by women, or companies led by black founders. At the same time, I was starting to read a lot about unconscious bias in Silicon Valley, and I was looking for someone who looked like me who was writing checks, because I wanted to be their apprentice, or learn from them. I couldn't find anyone, and this was just three or four years ago.
Any time you're the first or second or third person to see an entire ecosystem of founders, in any sector, you have an advantage. Just like someone who might say, “There's no investors, there's no venture capital, in Minnesota.” You set up shop in Minnesota and you becomes the person that every founder in Minnesota calls first. You have a high probably of success just by being first. That's how I was looking at it. It wasn't a social impact mission at the time, it wasn't about being helpful to founders or making myself feel good about helping founders. I saw a really interesting financial opportunity. Since then, of course, the social impact has found me, and it's been a wonderful byproduct.
When I started I thought maybe I'd see a few dozen deals over a couple of years, and I'd choose maybe 10 of those. I also thought that it would be hard to find companies that were founded and had CEOs that were of color, that it would be more "traditional" founders who had, maybe, a first employee that was of color, or a co-founder that they brought into the mix. What I found instead is that we there's an embarrassment or riches when it comes to founders who are underrepresented, and who are starting companies, who are leading those companies, and who have a very diverse team starting out. I also thought that I would see mostly, and this is my own bias, companies that were about hair care products or lifestyle brands, things that were more about marketplace. What I found is that we are seeing companies in spaces almost across the board. Really deep technology, really interesting things that I have to learn about on a day to day basis, that are just really pleasantly surprising to me.
These companies are discounted because they're not perceived as strong of an as investment as others, simply based on, in a lot of cases, their profile as a founder. Maybe they are working on something that is hard for other investors to understand, or it's their geographic location, since a lot of investors don't like to go outside of the coasts.
VN: What do you like to invest in? What are your categories of interest?
AH: We are purposely sector and industry agnostic. We cast a wide net when it comes to that because we don't want to limit ourselves this early. As we raise more funds we'll be more and more sector specific. As I learn more, my tastes may change or become more refined, and I think we'll be more focused, maybe. But, right now, we're a generalist fund.
We get to see a lot of cool things is basically the answer. In one day we can look at something in healthcare, in fintech, in hardware. I think that's really an advantage for us, because we are focused once we're looking at companies.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
AH: We have 40 companies in our portfolio in the last 18 months.
There's a company called Kairos, based in Miami, that does facial and emotion recognition. I saw them very early in my journey; they were the first company we invested in. I saw a video of Brian Brackeen, the founder, talking around three and a half years ago, and he seemed to be a really brilliant guy, with a pedigree. He had worked at IBM, worked at Apple, led teams and had what I thought was an interesting product. It was tech heavy, a kind of nerdy, unsexy product and he was having trouble raising, and I thought that was crazy. I was really excited when we were finally able to meet two years later, after seeing that first video, and finally getting to invest.
Kairos projected in 2016 that they would do about $2 million in sales in 2017. So far this year they've booked $2.6 million already. They're B2B, and they really figured out a way to streamline things and to scale and I'm exciting about their trajectory. What I saw in Brian, first he had his own skin in the game and he was bootstrapping. He's from the east coast, and there's this mentality of 'make money first and then go ask for money.' He started out the gate with revenue, and I thought that was really interesting. I liked the way he thought. He reminded me of Aaron Levie, or what I knew of Aaron at the time.
There's a company called CEEK VR, which is also out of Miami. They're led by a black woman who, in my opinion, should have her own sequel to Hidden Figures. Her name is Mary Spio and she's one of those hidden gems. I put her in front of a few investors recently and their jaws dropped and they couldn't believe that they never heard of her. She has such a distinguished background, working with satellites and building companies, and doing really amazing things. She grew up in Ghana, where there was a lot of turmoil, and she found solace watching the small television they had in their living room. When she was watching TV she felt like she was being transported out of the misery that was around her. So she made the decision at a very young age that she would figure a way to work in TV, creating stories to make others feel that way.
She did a lot of things in the film space, and now she runs CEEK, which is virtual reality for experiences. The beachhead is live music events, where they pair their VR content with Google cardboard type of headsets. Their first pairing was a Megadeath album, which was paired with this live music experience that they produced. It sold 10,000 copies within a week at Best Buy across the country. It was sold out, and they were not projecting that; they were projecting that to be a much longer process. They were also part of a team with Megadeath that won a Grammy this year. I'm really excited about what's on the horizon for them. I think that they can do some interesting things in education and in bringing live music events to homes. I have a history in live music production so that really hits home for me.
VN: What do you look for in companies that you put money in? What are the most important qualities?
AH: Being in the room with people, meeting them for the first time, or seeing them talk usually does it. It's about this diamond in the rough feeling, which most VCs must feel, but there is a certain relatability. Someone said to me that I was pattern matching for grit, which I can understand. I'm doing my own pattern matching, but it's just in a different way. We have different experiences but I can relate to women and I can relate with LGBT founders and with people of color. That is just so authentic and something that can't be manufactured. It's a combination of that and being a bit of a Simon Cowell and looking for that talent where I don't have the talent.
VN: What kind of traction do you look for in your startups? And can you be specific? Are you looking for a number of customers or order volume?
AH: We are pre-seed and seed for the most part, so there are not a ton of metrics when we first see a company. It has to be bit more about instinct.
I’ve been surprised since I thought we'd be investing in companies a lot more in the back of napkin idea phase, because that's what I thought we’d be getting. What we're seeing now is really interesting: it turns out that women and people of color and LGBT founders, have, if you believe our theory, had to always be a little bit better than the person next to them in order to get to this point. They've always had to be 2x, 5x, 10x smarter, faster and better in the room in order to be recognized. That same quality in a person, the same thing that's not fair to them, makes that founder more prone to looking for revenue or generating users earlier in the process. There are a lot of companies I see that are being founded that are based on predictions and what could happen, which is fine, but the majority of companies in our portfolio already have really significant growth when you compare them month-over-month or year-over-year.
That's what we’re able to look at. We're not going to see as much paper gains right now, because we're early and because there;s still unconscious bias when trying to get funding for the next round, which is a whole other thing we have to tackle. What we can show is that we have companies that have 100 percent month over month growth. There's a company in our portfolio that has 500 percent year over year growth. These things are not rare in our portfolio.
VN: How long does it take before you meet a startup and make an investment and how do you conduct your due diligence?
AH: As of this year, we have an application process, which is almost like an accelerator. We saw 1,000 companies in 2016 and 800 were inbound, cold calls for the most part. So about 80 percent is inbound because of the interest we've generated. We're creating a moat around us, where we are, in a lot cases, the first call from underrepresented founders who are learning about us through word of mouth, or through press, and by our current founders being excited and part of our community that we’re building. There's this very strong community that's being built.
The other 20 percent is a mixture of a very warm introductions from one of our LPs, or myself and our team, our crew, looking at things. I don't attend a ton of demo days, but I will do office hours at events where I know that underrepresented founders will be. I'll meet a lot of founders that way. I'm also very accessible online, and I will continue to be as much as possible because I think that's really important.
The thing that probably gave us our edge very early on was that I had spent most of my adult life on some sort of tour for music. Whether that was in a van with Norwegian pop punkers, eating food out of gas stations, or touring with an A-list artist on planes, and in four and five star resorts, I was very used to being in a new city every day from being on the road. So, very early on, I hit the road. I'm based in Los Angeles, but I didn't want to find all my companies in LA or Silicon Valley or California. I said, "They're going to be everywhere, and we need to look everywhere. We need to be able to be open to that." I got a lot of frequent flier points, and a lot of miles, under my belt in the first year. So, not only do we get a lot of online inbound, but now there about a dozen cities across the country where the tech leaders in those cities know to reach out to me with the local cream of the crop.
VN: These days a seed round is yesterday's Series A, meaning today a company raises a $3M seed and no one blinks. But 10 years ago, $3M was a Series A. So what are the attributes of a seed round vs a Series A round?
AH: Everything that our founders go through is a little bit of different experience than everyone else. What we’re focused on is that, while these $10 million deals are being done, and these $5 million Series A rounds, we are still struggling to see investors really take our founders seriously, even with the incredible growth that I mentioned earlier. I see people getting these big deals, where one of our genius founders can't even raise $500,000 in their seed.
The way that I look at that right now is what a missed opportunity for investors that are a little but further along than we are, in terms of the size of their fund. What a really missed opportunity for discounted rates, high performing founders who have a lot to lose, and therefore would be twice as likely to win.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
AH: I grew up in Dallas. I didn't go to college; I was accepted, but I didn't go, for a couple of reasons. I wasn't really looking at sitting in class for another four years. I was an overachieving student, who was very restless, so I spent half of my time, or more, in principal's office in high school because I "disrupted class" with questions. I dared to ask questions in their class, so I got sent to the principal's office a lot, and I just wasn't ready for four more years of that. Instead, I did a lot of bouncing around. I've worked since I was 14, and I've had maybe 20 different jobs.
I started a magazine in my 20s, which was bootstrapped, and I got it to the point where it was being quoted for acquisition, but I really didn't know enough about the business side of things, so that fell through. It was in 2008, when everything exploded. Fast forward a few years, and odd jobs, later and I discovered Silicon Valley in 2012. I discovered what that was and what that meant. I didn't know what venture capital was, I didn't know what whole ecosystem was, but I started noticing that people like Ashton Kutcher, Troy Carter, and Ellen DeGeneres were making these small investments in companies that were only two or three people. I was really curious about why they were doing that, because it seemed to me that they had a really cool job, and something that was getting their attention was curious to me. So I started absorbing all the information I possibly could. I did what I call "homeschooling," and just looked up the Brad Felds and Chris Saccas, and looked up what they were doing and then looked up to them.
I looked back at work I did on the magazine for five years of my life and it was the best and worst time of my life. I looked back at that and said, "I wasn't a failure when the magazine crashed, I was an entrepreneur. I was a startup founder." It was like I had found my tribe, my people, and this is what I was meant to do. That was really life changing for me to understand that. Then, as a hobby, I started reaching out to companies, offering to help in small ways, kind of like the internship to my homeschooling, basically. I just wanted to be involved somehow. That led to offers from maybe half a dozen companies, and then they were starting to raise money. I've always has a really diverse, strong network; I've been networking since I was in the third grade. Even though I didn't have means myself to invest, I had access to investors, angels mostly, and I started connecting with VCs, just cold calling them, and I became this person who had deals. That's when I started seeing these weird trends where it was all about the deck; it wasn't about the company, it was about that slide in the deck that had people's names on it. It was really strange to me that every single investor would say the same thing about a certain company. They can't all not understand the market. That was like code. I spent about five minutes being upset and offended, and then on the sixth minute I said, "Wait a second, there's an opportunity here."
I eventually found Kesha Cash, who is a black woman VC. I did eventually learn about Kapor Capital, who invests a lot of money into underrepresented founders. But that's one, two three drops in the bucket of thousands of investors, and I wasn't seeing myself reflected. I said, "If I'm not seeing myself reflected, then there's a lot of people who aren't seeing themselves." That's when I set out on this very, very long, arduous journey of raising a small fund.
VN: What do you like best about being a VC? What makes you excited?
AH: I love enabling innovation in a new ecosystem of founders, but shining the spotlight on pioneering women of color is my favorite part.
VN: What is the size of your current fund?
AH: Approximately $2 million
VN: What is the investment range?
AH: We invest between $25,000 and $100,000
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20% or 30% of a round?
AH: Around 1 percent or 2 percent.
VN: Where is the firm currently in the investing cycle of its current fund?
AH: We've invested in nine of the 30 or so companies we'll invest in out of this fund and have a queue.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
AH: Pre-Seed, Seed and opportunistic Series A.
VN: In a typical year how many startups do you invest in?
AH: We've invested in 39 companies in the first 18 months and plan on continuing that pace.
VN: Is there anything else you think I should know about you or the firm?
AH: Yes, we have a new podcast, called The Bootstrapped VC!